Here’s an interesting question that popped up in my head as a result of Warren Buffett’s op-ed last week – should the bar for “high income” be at $250,000, $500,000, or some higher value? Should the bar be at a dollar amount relative to median income or should it be a calculated based on how many taxpayers it would capture?

My feeling is that we should probably tie our tax returns more to the median income, rather than calculating approximately how many people it will affect. I think $250,000 and $500,000 are simply nice round numbers people like to use but the reality is that very few people make over $200,000. 3%. Three people out of a hundred earned more than $200,000 in 2008 (granted, I know things can be deferred and there are other games to play but let’s keep it simple).

This makes me wonder… does it matter? There will be so few people, percentage-wise, that are affected if the bar were set at $250,000 compared to $500,000 that I hope this isn’t a sticking point!

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39 Responses to “Your Take: $250,000 vs. $500,000 vs. What Is Rich?”

My wife and I have a combined earned income of about $160,000. we all have about $15,000 in passive income from investments. We shelter tons of money from taxes through retirement plans as well as depreciation of certain investments.

I feel that our taxes are entirely too low. I think we need to raise taxes on everyone, but if we are not going to raise them on everyone…I would probably use $100,000 or more as the point where I would raise them. People that much may complain that they are middle class, and they are….but we can afford more taxes since we have so many different ways to reduce our tax bills with 401k’s, 403bs, rental property depreciation, mortgage deductions, etc.

Math quibble: About 47% of American families pay no federal income tax, so that 3% figure refers to 3% of the 53% who do pay federal income taxes, or roughly the top 1.5% of all American families. The top income band is more thinly populated than you suggest.

Not entirely true. According to the IRS, there were 142.45 million tax returns in 2008 and of that close to 2.5 million had no adjusted gross income. So the numbers do include people who filed but had no AGI. There are also people who should’ve filed but didn’t, but those people are typically owed money. So it might be thinner than 3% of all American families but probably not that thin.

It’s not directly on point to the question you are asking, but I thought this WSJ article was interested. It states that the top 3% of earners were are paying a higher percentage of their income in taxes than the top 3% did in the 1950s, even with a top 91% marginal tax rate.

I am a big believer in the progressive tax system because it is the most effective means of protecting the middle class (a key engine in any healthy economy) and is a prime example of the coercive power of law in addressing social and economic justice. That said, lines must be drawn that are based not on nice round numbers, but multiples of median household income. In addition, with a progressive tax system, many lines can be drawn. Here’s what I’d love to see:

I believe the cap on income taxes should be 50% between federal and state.

By the way, the tax problem on the ‘rich’ isn’t so much about taxing ordinary income, it’s more about taxing capital gains. For those making five times or ten times median household income, these should be taxed at ordinary income rates minus 5%. That way the incentive remains for long-term holding periods, but the tax rate for someone making $10 million would go from 15% to 40% using the example tax brackets above.

It’d be nice if they fixed AMT permanently as well. As it stands, a lot of middle income households are going to get a nasty tax bill because of Congressional inaction.

Very intelligent response. Nicely said. The skeptic in me has always figured that the government has never wanted to tie numbers to median income or inflation, because just like AMT – it starts off and gets passed as a tax on ” the wealthy” and then over time it just becomes a way to tax the middle class more. (hopefully we have learned from this???)

I really liked your comment on keeping total State and Fed tax <50% – many folks in other states dont have to worry about this, but I live in CA where our rates are starting to rival the fed's (not really, but they are very high).

Finally my only addition to your proposal would be to change corporate incometaxto 0% for income paid in the form of dividends, BUT then tax all dividend disteibutions as Ordinary Income to individuals. That way high earners pay more – as so many people want these days, but we make it more transparent since that money is actually double taxed today. Additionally, lower earners could find added income in dividends and keep more of the money since their ordinSchierholtzary tax rate would be lower.

I’d argue that the role of government is not to promote or enforce social or economic justice, but to provide a set of laws that treat everyone equally, and provide the opportunity for individuals to succeed or fail based on their own skills and ambition. The current tax code has been corrupted over the years by politicians to favor their cronies, and there is only one way to eliminate this corruption……. a flat tax with no deductions. The tax could kick in at about $40K and wouldn’t come with any of the dis-incentives of so-called “progressive” tax rates. Double taxation on dividends should be eliminated and capital gains indexed for inflation. Government greed (not to mention the stupidity of politicians) is one of the country’s major problems. No government deserves 50% of anyone’s income.

A large percentage of those with incomes in the low multiple hundreds of thousands (e.g., $150,000-$400,000) are there just temporarily, often for only one year, so we really need to stop confusing income with wealth. Wealth = piles of money in the bank. Just because someone has a high income, that does not necessarily mean the person is wealthy.

To directly answer the question, I would put the limit at $1,000,000.

However, MUCH better systems of taxation exist; the best is a consumption-based tax with an exemption for a certain amount of spending (varying by size of family and geographic location) to cover basic needs.

We also need to stop our wealth envy. I am not “rich” by any stretch, and I do not envy those with more wealth than myself. Rather, I want to learn from those who are wealthy, so that I myself can become wealthy. Rather than fostering wealth envy, we as a society should encourage everyone to become as wealthy as he wants to be.

I think Rich is a relative term. Earning $250K/year in a job in Manhattan New York is a whole lot different than $250K/year in a job in Manhattan Kansas. I wouldn’t call the guy living on $250K a year in NYC rich, but I’d think the guy in Kansas could afford quite the comfortable lifestyle on $250K a year.

The biggest problem is not picking a number but making the tax system fairer and less complicated. Drawing a line in the sand at $250k or $500k or $1 million will only matter to the people who are right at the line one way or another, people making $1 million can careless if the line is at $250k or $500k etc. The problem is the line is arbitrary and doesn’t solve the problem; you can’t use median income as that is calculated retroactively after everyone files and is extremely complex from a software design perspective. Geography plays into as well in NY $250k is middle class in North Dakota it is extremely high income, once again making the rates different in different geographies creates ways for the wealthy to shift assets and shelter them, not to mention another software nightmare. Lastly most people suggest what works best for their situation like @ChrisCD wants medical deductions because that is his big expense, but thinks we should drop the mortgage interest deduction, but in reality more people can take advantage of the mortgage interest deduction than medical expenses.
The problem is the complexity of the tax code, it needs to be simplified which will make it more fair in general and it also needs to increase revenue as that is needed to solve our fiscal crisis. With the revenue increase also spending cuts are required as that is also required to solve our fiscal crisis.
One last point I have to make, it really bothers me when people making a few hundred thousand or less complain that they pay a higher percentage in taxes while those who make millions have a lower marginal tax rate, if you pay 25% of $100k you are paying $25k in taxes, if someone making $10 million pays 15% they are paying $1.5 million in taxes, that is 10.5 times the gross pay of the middle class tax payer. The person making $10 million is never the person complaining and many have said they would gladly pay another $1 million in taxes to be at 25% too. To me the complaining just sounds like wealth envy and is very petty.

So much to take into account, I think the biggest factors are the average cost of living in your area, and how many people depend on your income. Deductions based on dependents do help, but I don’t think they are enough

I think the line itself should be cut based on the actual population, that way it can’t really be gamed. The people earning in the top X% are considered rich and need to pay more taxes.

Instead of picking an arbitrary number like 250k or 500k, why not choose a percentage value that will fit what the super rich are earning?

The real problem is the question. Make it $250k or %500k. It doesn’t matter. Our politicains will spend 140% of whatever it takes in. If our politicians didn’t spend so much trying to pander to special interest groups, then we wouldn’t need to collect so much in taxes.

$200,000 per person / $250,000 per family seems a little low to be defined as rich.

But I just saw an article claiming that Obama means $250,000 in “2009 dollars”, and that the amount refers to taxable income (not including deductions like 401k), so that the real number now is like $305,000 gross per family. I still wouldn’t call that rich (that’s $150,000 per person for a couple), but it doesn’t sound completely unreasonable to increase tax rates a little for amounts above that, assuming that it applies to just the amount above that limit (it’s not clear to me exactly how the increased capital gains rate would be applied).

Wouldn’t the Democrats then say that people who spend more should pay a higher consumption tax rate?

And I don’t think spending increases linearly with income, especially for rich people. It seems like the consumption tax rate would have to be a lot higher than income tax rates? It sounds good for investors (compounding effects would be greater since they don’t pay any tax for many years until they take money out of the investments to spend it)? Though then the gap between rich and poor people would get bigger?

I’m sick of all this war on prosperity crap. We live in American— there are no classes, and why punish those who acheive the American dream any more than they are already punished. The tax code is more progressive right now than it has ever been. The real problem is that government spending has dramatically increased from 17-18% of GDP to 25% of GDP. Any new taxes collected will not be used for deficit reduction, but for increased government spending, so don’t kid yourself. Check history if you don’t believe me. Buffett is so disengenuous on this issue it’s hard to have any respect for him. The Laffer curve is alive and well, and we have to keep learning the same lessons over and over again.

Jim, I really enjoy your blog. It’s one of the best.
I feel the wealthy should pay more. From 1945 to 1981 (beginning of the Reagan era)the highest tax rate ranged from 75% to 95%.
The wealthy do not work harder or smarter – not to that degree to warrant the rates they enjoy today.
I think Obama should have posited the top rate at 75%, and then settled at 69% (10X the revenue the 39% he vying for now). Then both parties could have boasted for a “win”.
Most peoiple don’t realise that even at the 250K higher rate, they still pay the same incremental tax rate as those under that amount. It’s only above the 250K income that they start getting taxed at a greater rate.

I would say it’s all relative. What is a huge sum of money for someone is just a small amount for another person. However I consider the 1 percenters rich, since they have clearly gotten ahead of most of the other people in the society.

“I believe the cap on income taxes should be 50% between federal and state.”

I don’t think it would be really feasible to cap a combined rate. Some states have no taxes some go as high as 11%. How do you reconcile that?

e.g. theres no state income tax in WA but OR pays up to 11%. So how do you figure a combined 50% rate across such states?
Would you have people in WA pay 50% to the fed and people in OR pay only 39%? Or does everyone pay the lower just cause some states have high state taxes?

Millionaire doesn’t mean much these days; $1 million isn’t enough to retire with. I wouldn’t consider myself rich until I have enough money that I never need to work again (and even that cutoff point is probably too low; if you can retire but only by eating ramen noodles at every meal, does that make you rich?).

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